In 1981, a group of tech-savvy entrepreneurs founded Peregrine Systems Inc, a software company that specialized in providing software solutions for IT asset management and service management. The company went public in 1997 and enjoyed rapid growth and success, becoming one of the leading software companies in its field. But little did the world know, behind the scenes the company had a secret recipe for success – a dash of accounting fraud, a pinch of inflated revenue and earnings, and a whole lot of deception.
The fraud was orchestrated by top executives at the company, including Stephen Gardner, the CEO and Chairman of the Board, and other executives. They had been cooking the books by recognizing revenue from fictitious sales and by recording revenue from sales before they were complete. This deception allowed the company to meet Wall Street expectations and boost the company’s stock price. The fraud was so extensive that the company’s financial statements were overstated by hundreds of millions of dollars. This deception allowed the company to secure more funding and inflate the value of the company. The executives also received large bonuses and salary increases based on the false financial information.
The fraud was eventually uncovered by the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ). In 2002, the SEC filed a civil lawsuit against Peregrine Systems and its executives, accusing them of securities fraud. The DOJ also filed criminal charges against several executives, including Stephen Gardner, who was eventually convicted of securities fraud and other charges. He was sentenced to prison for 18 months.
As a result of the fraud, Peregrine Systems was forced to restate its financial statements for several years and pay millions of dollars in fines and penalties. The company also had to restructure its operations and management, which led to the loss of jobs and other financial difficulties. The company filed for bankruptcy in 2002 and was subsequently acquired by HP.
The Peregrine Systems Inc fraud serves as a reminder of the importance of corporate governance and the need for effective oversight to prevent such frauds in the future. It also highlights the need for proper financial reporting and transparency to ensure that shareholders and investors have accurate information on which to base their decisions. The case also showed how the use of non-GAAP measures, such as recognizing revenue from fictitious sales, can be used to deceive investors and manipulate the company’s financial statements. So, the next time you’re using software for IT asset management and service management, remember the story of Peregrine Systems Inc and the importance of keeping a close eye on your software provider’s books.